Using Binary Options to Trade Ranges

Using Binary Options to Trade Ranges

When you’re scanning the market for trading opportunities one possible strategy to keep in mind is possible trading ranges that form and act as magnets for the market. While there is no guarantee that can ever be made about where the market will trade to in the short or long term, you can make decisions based on probabilities of certain events occurring.

Using Binary Options to Trade Ranges
Using Binary Options to Trade Ranges Getty Images

By searching for trading ranges and possible expansions and retracements zones you can be prepared for the variety of ways the market may react on a certain day and possibly have an edge in your trading. If you’re trading in the short term then you should be looking for short term trading ranges and if you’re trading longer term then naturally you will be looking for much longer ranges.

Here we see a chart of the US Tech 100 Daily on the Nadex Exchange, which is based off the CME E-mini Nasdaq 100 June Futures. This chart is as of about 8:15 am ET this morning, leaving almost 8 hours until expiration for the daily binary options listed along the right axis.

Using Binary Options to Trade Ranges

Overnight you can see that the Nasdaq 100 traded to the 4,364 level on a few occasions before falling hard beginning at about 6:30 am ET. If you felt this range would be a possible ceiling for the trading day then one of your trading strategies could be to use binary options. You could sell the 4,360 binary option for $27.50. This binary option is more than 12 points above the current market. As long as the underlying contract expires at 4:15 pm ET today at 4,360 or lower then the contract that you sold would expire worthless and you would profit.

Your maximum risk in this trade is capped at $72.50 while your maximum profit is the $27.50 of your initial sale. You are risking $2.64 for every $1 in profit if you hold the binary option until expiration. If you wanted to cut down your potential risk you could always decide to exit the position if the underlying contract moved back towards your strike price at any point prior to expiration. If the Nasdaq 100 Futures traded up to 4,360 then you could exit your binary option near 50. If you used a mental stop of 54, assuming there was a bid/ask of 46/54 when the underlying was at your strike price, you would cut your potential Risk down to only $26.50. You would still have the same 12 points the market had to move against you yet you are now risking essentially $1 to make $1.

Inversely, depending on your market direction bias and expectation, if you felt the market could expand toward the negative side today then there are possibilities there as well. Using simple ABCD expansion possibilities, here is a chart of the same US Tech 100 on the Nadex exchange with just a few lines drawn illustrating a possible negative move.

Using Binary Options to Trade Ranges

The next time you’re scanning the market for opportunities keep in mind that binary options on the Nadex Exchange are another opportunity to examine for profitable trading set-ups. You can open a demo account with $25,000 of play money to acclimate yourself with their platform and the markets they offer.

Note: Exchange fees excluded for calculations.

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